Inflation in the UK fell by more than expected last month, driven largely by the drop in petrol costs and a further easing in food price rises.
Official data from the Office for National Statistics (ONS) shows the Consumer Prices Index (CPI) rose by an annual 3.9% in November – the lowest reading since September 2021. The figure was down from 4.6% in October and lower than economists forecasts of 4.4%.
The easing in inflation reflected downward contributions from several areas, most notably transport, recreation and culture, clothing, and food and non-alcoholic beverages. There were no parts of the economy with large upward effects.
Food and non-alcoholic beverage prices rose 0.3% between October and November, compared with a rise of 1.1% a year ago. The annual rate was 9.2%, easing for the eighth consecutive month from a 45-year high of 19.2% in March. The rate now stands at its lowest level since May 2022 when the war in Ukraine contributed to a surge in food costs.
The easing in the annual rate for food and non-alcoholic beverages was driven by bread and cereals, where prices fell by 0.8% on the month, compared with a rise of 1.9% a year ago. Other smaller downward contributions came from classes such as meat, milk, cheese, eggs, and soft drinks. The only partially offsetting upward effect came from fruit after the prices of strawberries rose.
Balwinder Dhoot, director of sustainability and growth at the Food and Drink Federation (FDF), noted that food and drink manufacturers were doing all they could to keep prices as low as possible for consumers. However, he added: “While agricultural commodity prices are generally falling, they remain 21% higher than they were pre-pandemic. There have been significant price rises in cocoa – reaching a 25-year high, while olive oil prices are almost double than a year ago. The recent navigation turmoil in the Red Sea will likely add to inflationary pressures on our sector, with global shipping rates increasing by 10% since the start of the month.”
Whilst a welcome drop, economists noted that inflation is still nearly double the 2% inflation target aimed for by policymakers at the Bank of England. Such highs are why the central bank had said it is too early to talk about cutting interest rates.
However, Thomas Pugh, economist at RSM UK, stated that if this trend continues, the MPC may be able to start cutting interest rates as early as May next year.
He added: “The sharp drop in inflation will also be important for the labour market. Real wage growth will pick up sharply in Q4, which should help the economy to avoid a recession at the end of the year. The sharp fall in November should also help to anchor inflation expectations slow nominal wage growth, reducing one of the key risks for the MPC.
“Inflation will probably hover around current levels for the rest of the year before taking another leg down in the spring. However, while today’s data is good news for the economy, it is worth sounding a note of caution. Services inflation at 6.3% is still far too high for the MPC to be comfortable with, and unless wage growth slows sharply, the MPC may not be ready to cut interest rates as early as the market is now pricing in.”
NAM Implications:
- Key is the difference in inflation rates of government and cash-strapped consumers’ perception.
- NB. Official stats are 2x Bank of England targets.
- Meanwhile, any breath-holding re a reduction anytime soon would be unwise…
